Introduction Hi-P International Limited (Hi-P) is an integrated contract manufacturing servic es provider specializing in services such as designing and

fabricating of mold ( MDF), precision plastic injection molding (PPIM). From its incorporation in Sing apore on 26 December 1980 to its subsequent listing on the Singapore Stock Excha nge on 17 December 2003, Hi-P has grown by leaps and bounds. From a small toolma ker, Hi-P has managed to transform itself to be a successful global industrial s upplier of electro-mechanical modules to the telecommunications, consumer electr onics and computing industries. Some of their customer base now includes leading consumer brands such as Motorola, Research in Motion, Apple, Siemens, Hitachi, NEC and Baxter. Since 2006, Hi-P has adopted the business strategy of focusing on only two strat egic business units, which are the Wireless business and the Consumer Electronic s business unit. This business strategy has helped the company to eliminate geog raphical barrier and utilize its resources more efficiently, giving more value f or its customers with its high quality products and services. Macro-Economic Analysis There are three main regional drivers of growth in the world economy at the mome nt, namely the US, Europe, and Asia. US was most severely affected by the global financial crisis and is still on the path towards recovery, although recent emp loyment statistics suggest some cause for optimism, with the unemployment rate d ropping from 9.8% to 8.3% . Asia has remained steadfast throughout 2009, relatively unaffected by the financ ial crisis. However, a growing concern is that Chinas export dependent economy wo uld soon be slowing down amid sluggish demand in Europe and China itself may eve n be heading for a hard landing as experts foresee China struggling to maintain its export and capital spending-driven growth; exacerbated by its unique social and political problems as well as overheated property market. Industry Outlook Meanwhile in Singapore where Hi-P is based, full year Real GDP growth for 2011 a mounted to 4.9%. However, Q4 Real GDP growth faltered by 2.5% quarter on quarter . The manufacturing sector alone fell by 11.01% quarter on quarter, and the elec tronics cluster (of which Hi-P is a part of) in particular recorded a third sequ ential quarter of decline. According to MAS, this has dampened activity in the pr ecision engineering cluster, as companies held back on machinery and equipment i nvestments. The high US and Europe unemployment rate and dubious economic outlook through 20 11 has influenced global demand for manufacturing and electronics. For 2012, a M AS survey of 21 economists forecasted growth for GDP to come in at 3.0%, with CP I inflation of 3.1%. Such lukewarm sentiment reflects the uncertain economic con ditions in the world at the moment, the consumer electronics sector will likely be lukewarm at best in the near future, and so will the demand for Hi-P Internat ionals goods and services. Besides, the macroeconomic uncertainties, cost of sales amounted to 81% of Hi-Ps revenues. Two main factors responsible for the cost of sales are materials and l abour costs. Labour costs are rising in Hi-Ps Chinese factories due to societal p ressures and general inflation, while raw materials prices have been consistentl y on the rise since 2009. These factors are expected to affect Hi-Ps gross profi ts and consequently its bottom line. Industry Players Being in the fabricated plastic and rubber industry, there are several companies that are similar to Hi-P in terms of their business model and target segment su ch as Meiban Group Limited and JLJ Holdings Limited. However these competitors a

lso differ greatly in terms of their size, operations and assets when compared w ith Hi-P. Revenue - SGD (mil) Assets - SGD (mil) Gross Profit Margin Employees Table 1: Hi-P vs. Meiban As seen from Table 1, Hi-P is in fact the heavy weight player of the fabricated plastic and rubber industry. The closest competition posed would then be Meiban Group Limited (Meiban), which also operates across Singapore, Malaysia and China . Adopting similar business strategy as Hi-P, Meiban began vertically integratin g its manufacturing lines in 2008. Despite their lower assets size and revenue, Meiban has a strong clientele base contributed largely by Dyson and Hewlett Pack ard (HP). Hi-P Revisited Reviewing the current macro-economic outlook as well as the trends of the indust ry, a SWOT analysis of Hi-P can be summarized as follows: Strengths Weakness Diversified clientele profile Wide geographical manufacturing plants Opportunities Rising end user demands Potential vertical integrated ODM/EMS provider Hi-P 1,254.5 428.3 1,075.6 293.5 18.96% 8.79% 3,454 3,467 Meiban

Increase in borrowings and loans

Threats Labour issues at foreign manufacturing plants Foreign exchange risk exposure Table 2: Hi-P SWOT Analysis Overall, despite the general sluggish outlook for the macro-economic of the worl d market, demand for Hi-Ps end products is expected to be sustained in the next f ew years. An upward sales trend for Hi-Ps end products; namely its Apple products can also be forecasted as Hi-P focuses on its current strategy to move up its o perations to a higher value chain by not restricting its production to component manufacturing solely. For example, in the fourth quarter of 2010, Hi-P even acq uired Motorola Mobility Singapore design centre. This will pave way for Hi-P to engage in the designing of tablets and other electronic devices in the near futu re. This strategy also rationalizes Hi-Ps increased in borrowings over the last three years as it purchases new machinery with the intent to increase its production capacity. Effective from 1 Jan 2010 onwards, the company has also begun implemen ting a consolidation exercise on all its overseas manufacturing plants under a s ingle manufacturing division. The exercise seeks to streamline the rising costs needed to run these facilities. As a result, several plants based in China have been closed and subsequently relocated. Financials In the fiscal year of 2011, the company recorded an increase in revenue of 25.7% (SGD 1,203.9 million) as compared to the total revenue of S$957.7 million at th

e end of December 2010. Meanwhile, its gross profit is noted to have decreased b y 28.0% (SGD 130.8 million) while total selling, distribution and administrativ e expenditure increased by 4.1% (SGD 79.2 million). Total asset of the company stands at SGD1,076.1 million of which approximately 7 2% (SGD 775.3mil) were attributed to the companys total current assets; consistin g mostly of cash and equivalents. Meanwhile, non-current assets value was domina ted largely by the plant, property and equipment (PPE) owned by the company, app roximately 95% of the total non-current assets. In terms of liabilities, Hi-P has a total liability of SGD 479.398 million, whic h is made up almost entirely of total current liabilities. These current liabili ties are attributed to payables as well as loans and borrowings. Other liabiliti es include long-term debt, which occupy a small fraction of the total debt. Most of the total equity of the company (SGD 595.7 million) is accounted to its reserve fund with almost a 1,000% increase in reserve fund as compared to the la st fiscal year (SGD 477,068 million). Other major equity items include share cap ital (SGD 119.7mil). The companys net sales reached SGD 957.7mil, 81% of which was cost of goods sold (SGD 776.2mil). Funds from operations were at SGD 66.9mil for the year. Financing activities dec reased cash by SGD 53.2mil mainly due to the repurchase of common stock. Similar ly, investing activities decreased cash by SGD 35.6mil, largely due to the purch ase of fixed assets. Ratios Profitability Over the last three years, Hi-Ps gross profit was at its highest (SGD 181.54mil) in FY2010. It then decreased by 28% to SGD 130.76mil in FY2011. Furthermore, ove r the last three years, the company has had a good standing in net profit margin when compared to its industry average. However, this value dropped to 3.74% in FY2011. This decrease was mainly due to pricing pressure, higher material costs due to change in product mix, increased labor costs and higher depreciation of S GD14.4mil. Nonetheless, competitor comparison of profit margins favors Hi-P, whose net prof it margin for FY2011 was 3.74%. This value is higher when compared to its compet itor, Meiban Group Ltd. (2.72%). Similarly, operating and gross profit margins w ere also ranked much higher than its competitor. Relative to Meiban Group, Hi-Ps return on assets ratio is also higher at 4.65%, a nd the company also displays minimal fluctuations of the ratio over the last 3 y ears. This represents a consistent usage of Hi-Ps assets. Hence, considering its return ratios and profit ratios, Hi-P is indeed more prof itable than its competitor. Efficiency Hi-Ps assets turnover ratio has been consistently high over the last 3 years, des pite a small dip in FY2009. This signifies the companys high efficiency in utiliz ing its assets to generate sales. However, when compared to Meiban Group, its assets turnover ratio is lower due t o the fact that the company has been purchasing new machinery over the last 3 ye ars with the intention of increasing its production capacity. The inventory turnover ratio has also been up over the last 3 years, recording i ts highest in FY2010 (9.60%). This signifies the companys profusion of proper inv entory management. However, if these values continue to increase, it would be unhealthy as it could

open Hi-P up to trouble should prices begin to fall. Compared to Meiban Group, Hi-Ps inventory turnover ratio is also stronger. Overall, Hi-Ps asset utilization has been quite high. As compared to its competit or it seems to be performing well, by a substantially favorable magnitude. Leverage Hi-Ps total debt to equity ratio has increased to 0.20 in the FY2011, which is be low its industry average of 0.26. The long-term debt to equity ratio decreased t o 0.00 in FY 2011. This is a good sign, indicating that it has been using less l everage and has a strong equity position. Furthermore, when comparing with it competitor, Hi-P can afford much more invest ment opportunities than Meiban Group.

Liquidity Hi-Ps current (1.63) and quick (1.33) ratios for the financial year 2011 were bot h below the industry average of 2.14 and 1.41 respectively. This corresponds wit h the increased contract orders for Hi-Ps product beginning from quarter four of FY2010 up till the end of FY2011. In order to meet those demands, the company en gaged in more trade payables and lease obligations thus resulting in an increase of 16.9% in current liabilities. Despite Hi-Ps low liquidity ratios when compared to both its industry as well as its competitor Meiban, this is congruent with Hi-Ps rapid expansion plans. In the short run, Hi-Ps liquidity is expected to remain low but it is likely to return to normal once the expansion plans amateur. Overall, Hi-P International Limiteds financials are quite solid. We have compared Hi-P against its competitor Meiban Group Limited and found that the company has historically commanded the highest net margins amongst all of them, a testament to its efficient cost structure. Moreover, the companys consistent increase in r evenue can be attributed to the ramp up of new projects, resulting from an incre ased demand from customers. Given our analysis, we believe that Hi-P has laid the groundwork for sustained g rowth in the future and we can expect that the company will continue to remain c ompetitive in this industry. Hence, investors should feel confident when investi ng in Hi-P. Valuations Price to Book ratio Upon evaluating Hi-P and its closest competitor, Meiban using the price to book ratio, it can be observed that Hi-P enjoys a higher a confidence among the inves tors as it consistently ranks above Meiban since the end of FY2007. As potential investors and industry experts heighten its speculation on the possibility of H i-P securing an extremely lucrative deal with Apple or its equivalent, this may explain an even higher forecasted price to book ratio for the upcoming FY2012.

Price to Earnings Ratio On the flipside, the price-earning ratio of Hi-P is noted to be decreasing since the start of FY2010 while its competitor Meiban is expected to command a higher price-earning ratio gradually. Meiban is also forecasted to overtake the former competition by FY2012. This may suggest that in the short run at least, investo rs have a greater confidence on Meibans earnings growth potential than Hi-P. The

reverse in the potential investors outlook may be traced back to them keeping in mind Hi-Ps restructuring and consolidation exercise since the start of FY 2010 be fore they are willing to pay more for Hi-Ps shares. Year 2012 2013 Projected FCFE 121 Year 2017 2018 Projected FCFE 90 2014 151 2019 90 2015 213 2020 90 2016 90 2021 90 90 90

Table 3: Discounted Cash Flow (a) WACC 7.66% Inflation Rate 1% Terminal Year 91 Outstanding Shares 825,001,000 PV of Equity 1,471,025,707 DCF Valuation 1.783059301 Table 4: Discounted Cash Flow (b) Calculation of weighted average for cost of capital is derived to be 7.66% with cost of equity being 9.43% and cost of debt being 0.40%. For a project to be fea sible, not just profitable, Hi-P must generate a return higher than the cost of capital. Based on assumptions of inflation rate of 1% and the terminal year to b e at $91million, a projection of free cash flows is made for a period from Year 2012 to Year 2021. The discounted cash flow and present value of free cash flows result in present value of enterprise value and a subtract of net debt will ret urn the present value of equity. With outstanding shares of 825,001,000 and pres ent value of equity to be at $1,471,025,707, the discounted valuation of a share of Hi-P is calculated to be at $1.78. Comparing this valuation price with the a ctual closing price of $0.96, we can the stock is significantly undervalued and thus a buy call. Year 2006 2007 2008 2009 2010 2011 Dividend $0.01 $0.0999 $0.008 $0.0964 $0.015 $0.0730 $0.022 $0.0627 $0.03 $0.0350 $0.036 Estimated value of stock price k = risk free rate 2.96% 2.35% 0.91% 0.34% 0.34% -

Table 5: Dividend Growth Model: Non-constant growth A dividend non-constant growth analysis is conducted and it is found that the va lue of stock of Hi-P in historical years deviate significantly from the actual s tock price now. The reason is because Hi-P has made an announcement on 11th May 2011; it will not declare any dividends on a temporary basis. Possible reasons f or Hi-P deciding not to declare dividend payments may be due to requiring more c apital for its capital expenditure and reserves to cushion possible unexpected c osts or future expansions. Due to the irregular dividends and being unsure if H i-P will continue not to declare any dividends, using the dividend growth model to predict future price of Hi-P will not be feasible. Hence, an investor would b e better off relying on the corporate valuation model to find the intrinsic valu e of Hi-P. Hi-P showed volatile returns with approximately -32% to 35% of profits monthly w ith mean returns approximately at 1.44 %. Overall accumulated monthly returns en ded with 86.63% profits over five years. At January 2008 and November 2008, the

period of financial crisis, Hi-P accumulated returns hit low of -51.31% and -72. 68% and a reversed return eventually hit the high of 93.15% in April 2011. This increasingly high return was also coupled with the speculated company performanc e of securing iPhone casing project. Meiban showed volatile returns with approximately -41.55% to 99.84% of profits m onthly with mean returns approximately at 2.03%. Overall accumulated monthly ret urns ended with 121.99% profits over five years. Beginning January 2008, price p lunged from 101.11% to -37.82% in October 2008 as again affected by the period o f financial crisis. Similar to Hi-P returns, Meiban return was reversed in Novem ber 2008 to hit new high of 121.99% as of today. Profits look more lucrative for Meiban but it is important to note of the abnormal monthly returns, which prove d Meiban to be more volatile than Hi-P. The risk free components were made up of 3-months Singapore treasury bills in mo nthly rate in determining monthly risk premium of stock and market risk premium. Beta was computed based on five years of historical monthly prices, where it is the slope of monthly risk premium of stock against market risk premium of Strai ts Time Index. The returned result from computation of beta for Hi-P Internation al was consistent with Bloomberg and One Source with a maximum difference of 0.0 2. From the result for both Hi-P and Meiban, we can conclude that both companies have more systematic risk than the overall market. The calculation of alpha als o returned positive at 0.013 and 0.019 for Hi-P and Meiban respectively. Althoug h alpha calculated varies significantly with the one derived from Bloomberg, bot h showed positive alphas, indicating Hi-P and Meiban outperformed the market by 0.013% and 0.019% respectively.

Returns and Volatility Analysis Hi-P Meiban CAPM (Expected returns) 0.13% 0.16% Arithmetic average 1.44% 2.03% Geometric Average 0.42% 0.51% Blumes Formula 0.84% 1.13% Variance 2.02% 3.75% Standard Deviation 14.23% 19.35% Table 9: Returns And Volatility Analysis The expected returns after factoring risk and time value of money, referred as C APM, showed positive returns with 0.13% and 0.16% for Hi-P and Meiban respective ly. The arithmetic and geometric average of 60 historical prices also showed pos itive returns of 1.44% and 0.42% for Hi-P and 2.03% and 0.51% for Meiban. As suc h, the forecast of 3 years returns with Blumes formula showed a return of 0.84% a nd 1.13% respectively. The higher return from Meiban is justified by the risk to be taken with variance of 3.75% and standard deviation of 19.35% as compared to Hi-P variance of 2.02% and standard deviation of 14.23%. As such higher risk are involved in investing in Meiban as compared to Hi-P in the returns variation. Hi-P has a R-squared of 0.299066, indicating 29.91% of total risks to be systema tic risks and 70.09% of total risks is idiosyncratic risk, which is diversifiabl e. Meiban has an R-squared of 0.283556, indicating 28.36% of total risks to be s

ystematic risks and 71.64% of total risks is idiosyncratic risk. All the risks a re based on 5 years historical data. In addition, p-value of t Stats for Hi-P and Meiban showed a significantly low v alue. This value reflects the probability of beta happening by chance and thus p roved the validity that the beta would be well reflecting the actually movement. Investments with Hi-P or Meiban proved to be profitable, with positive returns o ver the past 5 years. However, the risk that investor will have to bear varies b etween both companies. Meiban, as mentioned previously is more risky with higher volatility and uncertainty in returns and therefore investors will have to exer cise extra cautions in risk management (Buy call). The high on 21st February 2012 hit a high of 1.015 before turning for a retracem ent. This was followed by another high on 22nd March 2012 of 1.05. However, Osci llators by MACD, Relative Strength Index and Stochastic showed a lower high indi cated in blue. As such, it is highly possible that regular divergence occurred a nd the uptrend is no longer sustainable and a trend reversal is about to happen. This is also supported by the broke of trend line, with price closing below it, the oversold indication in all oscillators and the crossover confirmation of re ference line in both MACD and Stochastic. As such, when doing shorting on contra ct for difference for Hi-P, the first target profit would be 0.86 and second tar get profit at 0.72, with both target profits slightly above the different level of major support. Hi-P: Final Verdict In conclusion, discounted cash flow and risk and return analysis signaled buy ca lls with technical analysis showing a strong sell call. Technical analysis were done based on a short term forecast and as such, a weighted averaging entry in t he retracement price of $0.86 and $0.72 with take profit at $1.28 would prove to be safer and profitable trades as the overall trend were bullish. However, risk management has to be exercised in the event the market moved downwards given we ak sell call from market outlook and financial ratios. Thus, a stop loss at $0.5 0 would be valid in preventing fake breakout of prices.